Financial Reporting Choices and Labor Contract Negotiations: A Case Study in the University Sector

A sizeable literature has developed that considers the interest of labor unions in employer financial statements and the effect that interest has on employer accounting decisions. Empirical results have been mixed, but there is at least some evidence that employers facing union pressure engage in earnings management and strategic disclosure decisions that help to win concessions from labor unions. We use a model of labor negotiations (Walton et al., 2000) to focus on a single employer-union relationship, the University of Manitoba (UM) and its academic faculty union, the University of Manitoba Faculty Association (UMFA). UMFA performed and published an analysis of the UM's financial statements in preparation for its 2010 round of collective bargaining, allowing us to identify accounting variables key to that analysis. We show that UM deducted internal restrictions and capital transfers from operating income to give the impression that its ability to pay was compromised. In assessing 16 subsequent disclosure events by UM, its disclosure strategy appears to reflect primarily, but not uniformly, a forcing bargaining posture. Our analysis indicates that UM enjoyed considerable latitude in its financial reporting, which it used to its advantage in negotiations and to hinder budgetary oversight.